A legally binding contract between business co-owners that establishes what happens to an owner's interest when they leave, die, become disabled, or divorce. It specifies how ownership is valued, who can buy it, and how the buyout is funded.
buy-sell agreement
noun — A binding contract among co-owners of a business (also called a buyout agreement or business continuation agreement) that governs the transfer of ownership interests upon specified triggering events such as death, disability, retirement, voluntary departure, or involuntary removal. Establishes valuation methodology, purchase rights and obligations, payment terms, and funding mechanisms.
Why it matters
Without a buy-sell agreement, a departing partner's ownership doesn't disappear. It sits there — collecting value they're no longer earning, or worse, transferring to their spouse, their estate, or someone you never intended to be in business with. This is how dead equity is created and how partnerships fall apart.
A buy-sell agreement removes the need to negotiate during emotionally charged situations. When a partner dies, gets divorced, or decides to leave, the agreement dictates what happens next. The valuation methodology is already set. The funding mechanism is already in place. The remaining partners know what they owe and when.
How it works
A buy-sell agreement has three core components: triggering events, valuation, and funding.
| Component | What it covers |
|---|---|
| Triggering events | Death, disability, retirement, voluntary departure, involuntary removal, divorce, bankruptcy |
| Valuation method | Formula-based (revenue/earnings multiple), independent appraisal, or agreed value reviewed annually |
| Purchase rights | Right of first refusal, mandatory buyout obligations, cross-purchase vs. entity redemption |
| Funding | Life insurance (for death triggers), installment payments, sinking fund, or external financing |
| Payment terms | Lump sum vs. installments, interest rate, timeline, security for unpaid amounts |
There are two main structures. In a cross-purchase agreement, the remaining partners personally buy the departing partner's share. In an entity redemption, the company itself buys back the interest. Cross-purchase works better for small partnerships (2-3 owners), while entity redemption is simpler when there are many owners.
Frequently asked questions
What is a buy-sell agreement?
A buy-sell agreement is a legally binding contract between business co-owners that establishes what happens to an owner's interest when they leave the business, die, become disabled, divorce, or retire. It specifies how ownership will be valued, who has the right to purchase it, and how the buyout will be funded and paid.
Why do I need a buy-sell agreement?
Without one, a departing partner's ownership stake doesn't disappear. It can transfer to their spouse, estate, creditors, or someone you never intended to be in business with. A buy-sell agreement creates a predetermined process for ownership transitions, removing the need to negotiate during emotionally charged situations.
How is a business valued in a buy-sell agreement?
The three most common methods: formula-based (a multiple of revenue or earnings agreed upon in advance), independent appraisal (a third-party valuation at the time of the event), or agreed value (a dollar amount reviewed and updated annually). Formula-based is most common for small businesses because it avoids the cost and delay of an appraisal.
What is the difference between a buy-sell agreement and an operating agreement?
An operating agreement is the broader governance document for an LLC. A buy-sell agreement specifically addresses ownership transitions. Buy-sell provisions are often included as a section within the operating agreement rather than as a standalone document.
Learn more
- How to buy out a business partner
- Does your small business need an equity agreement?
- Equity for small businesses: partnerships, LLCs, and profit-sharing explained
Related terms
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